a16z Podcast - 16 Minutes on the News #5: Fed Real-time Payments, Death of Retail

Episode Date: August 11, 2019

with @astrange @jeff_jordan and @smc90 This is episode #5 of our new show, 16 Minutes, where we quickly cover recent headlines of the week, the a16z way -- why they're in the news; why they matter from our vantage point in tech -- and share our experts' views on these trends as well. This week we cover, with the following a16z experts: Federal Reserve real-time payment and settlement service FedNow, the U.S. payments rail, and fintech -- with a16z general partner Angela Strange; Barney's bankruptcy, the "death of retail", and ecommerce -- with a16z general partner Jeff Jordan; ...hosted by Sonal Chokshi.

Hi, everyone. Welcome to the A6 and Z podcast. I'm Sonal, and this is our fifth episode of 16 minutes, our new news show, where we cover recent headlines of the week, the A6 and Z way, why they're in the news, why they matter from our vantage point in tech, and share our experts' views on the trends involved as well. You can catch up on past episodes at A6NZ.com slash 16 minutes or subscribe to it as a separate feed in your favorite podcast player app. This week, we have two episodes since we'll be skipping next week. This episode, covers these two topics that came up in the news. A quick take on Barney's filing for bankruptcy and what that means in the context of the death of retail. But first, we go deeper into the Federal Reserve announcing Fed Now, which is a much bigger deal than it seems. What, why, and how. Okay, so the first segment this week covers some news that came out of the Federal Reserve, which is that just this week they announced that they are going to create something called Fed Now, a real-time payment service, so it would be open 24-7 days a week, that would allow people to get access to their checks faster. And even though it was announced this week, it actually is not out there in the

wild yet. It aims to launch in a few years. And just to give you some more context, this is really targeted over half the population who live paycheck to paycheck and need access to their money sooner. And right now, they're forced to pay a lot of late fees and overdraft fees. I mean, Overdraft fees alone were $34 billion in just the last year alone. And of course, many big banks are lobbying to stop this. And some of them have an alternative that they've proposed. Citibank, U.S. Bank Corp, and J.P. Morgan Chase, have their own instant payment system, which was launched in 2017 and operated by clearinghouse payments.

Now let me introduce our expert, a 6thency general partner, Angela Strange, who is on the FinTech team. Welcome, Angela. Thank you. Happy to be here. Let's first talk about this news. Like, first of all, is it really news? This is actually a very important announcement. So for the, you know, call it top half of the population, like, from a personal day-to-day use,

like, you probably don't care. Like, you use your credit card most of the time. You never hit zero in your bank balance. If someone gives you a check and you're waiting for it to clear, like, you probably don't notice if it clears in two days or four days. Like, that doesn't matter. But for the other half of the population, like, there's more than 40% of Americans that don't have $400 in savings, you're living paycheck to paycheck.

you care very, very much when funds hit your bank account. And right now, there are these totally unpredictable, untransparent delays. Like just, for instance, your company decides to pay you and they send the notification to the Federal Reserve. And if you're a contractor and you're getting paid by check, that check could take two days to clear. If you've had a bunch of overdrafts in your account, it could take seven days to clear.

So everyone that lives like this is in their head doing this juggling act of, okay, my paycheck's going to land in two days. I just put out my rent check, but it posted for a few days, so maybe I can afford to pay my cell phone bill. This check that I deposited, maybe that's going to land. And oh, by the way, every time you screw it up, it's a $30 overdraft fee. So you have this whole unpredictable juggling act that every time you screw it up, it costs you money. And so I think we should very much care because while this does sound like a nuanced regulatory issue, it's probably the biggest financial regressive tax that we have in the U.S.

Just for broader context, how does this compare to the rest of the world? The UK's had faster payments for the last 10 years. I heard somebody compare it to these. Like, I've had 10 versions of the iPhone since faster payments came out in the UK. And we still don't have in the U.S. It's in Singapore and Canada and Mexico. And so many, many, many countries are just leap years ahead of the U.S. Now, if you look at what do the rails look like in the U.S., obviously you've got

Visa and MasterCard and they take a percentage of transactions. Luckily, you've got all the peer-to-peer networks that have come out, Venmo and Scratch. and square cash and the likes. And those actually operate fairly instantly, but they're using ACH. What's ACH again? The automated clearinghouse. That's basically what we have. And the best comparison, I think, is comparing like ACH is snail mail to faster payments is email. And it's literally almost analogous. ACH batches all of the payments. And this is great for banks because tiny payments, small payments, it's all sent off usually once per day. And the big innovation there is is, oh, sometimes we'll batch them twice per day, which is a far cry from real-time payments.

Your point is that we might dismiss real-time as like a minor feature improvement if you don't really understand the scope of the problem. But actually, if you do understand the scope of the problem, this is extremely significant that you can actually go faster and current technology is not serving it. What's interesting here, and you mentioned this, is that we actually do have a real-time payment network of sorts in the U.S. So the 26-largest member banks own or part of an association called the clearinghouse. Right. And they launched real-time payments in 2017. And why is that not working?

But for really to work, you need all 10,000 financial institutions on this network. And that includes smaller banks. Smaller banks, regional banks. If you think, like, who needs this most, it's probably not the people that are banking at the major parts of major banks. And this network does cover 50% of direct deposit accounts, but not broad enough. So then you ask, Okay. So what's stopping all of the smaller banks from just joining the network? Because, like,

definitely the clearinghouse wants everybody to get on board. And it's two things. One, the Fed for a very long time has been making noises that they are going to get into the real-time clearing business. Which they clearly just made a louder noise. Which they clearly just did. And there's precedent. Like 40 plus years ago, they got into the ACH business. So there's actually two ACH networks. And the people that support this say, it's good to have competition. And that this is such a critical service to the nation that you would want, not just a private network, you actually want the government involved. So then if you're a small bank, you're like, okay, do I spend the expense to get involved in this network? Well, I'm just going to wait to see what the Fed is going to do.

And then the other piece is just a lack of trust of joining a network operated by larger banks. You're like, well, am I going to get priced out of being able to do these real-time payments? But the big policy debate is right now the Fed provides both a operational rule. and a regulatory role. There are people arguing that just do the regulatory role and why don't you regulate that this technology run by the clearinghouse that already exists can't charge exorbitant fees.

You should regulate that everybody has to join. Like this technology is already here. Right. And so that could, if it was done, get this real-time network going much faster than Fed now, which is now being called Fed five years from now because it's going to launch in 2023 and 2020. When I hear that kind of conundrum of do you have them regulated or wait for it, I'm sort of wondering, why would we do either? Why aren't there other alternative technologies that can solve this problem? I want to know where tech comes in in this. You need both the technology, but the harder piece to do is you need to get everybody to participate in this network. They should figure out a regulatory framework to get more people on the technology that already exists and get this problem that we're talking about that penalizes half of our population fixed facts.

while also building their network. Could a new startup come in and create a new real-time rail? Not in the same way, because what the real-time rail is saying they're going to do is interconnect the 10,000 financial Fed Reserve institutions together. So we do have things like peer-to-peer networks, and this is where PayPal and Venmo and those come in, but that's very different from, you know, I bank at Community Bank in Kansas, and I need to have my checks clear immediately. And so what FinTechs are doing is they're figuring.

out how to solve point problems that are very, very valuable to consumers. So for instance, if you're living paycheck to paycheck, you are watching by the hour when your paycheck lands. And what most people don't know is that banks are holding on to their paychecks or not delivering them as fast as possible. So for instance, your bank will get the notification that your employer has told the Federal Reserve that they're going to pay you X dollars. Those X dollars won't land in your bank account for another two days. usually. So there's a startup that can see, that is your bank, and they can see that your employer has said, hey, pay Sonal $500, and they'll give you $500 immediately. You don't have to wait two days.

Even beyond that, you could argue that if you're working eight hours a day at Panera Bread, for instance, it is somewhat anachronistic that you can only get paid on the first of the month and the 15th of the month, even though you're earning eight hours times your hourly wage every single day. If I've worked four days of that week, and therefore I should be able to get paid at least those four days. Or if there was no cost in payments, like, why aren't you just getting paid at the end of every day? That's a good question. Exactly. So the reason that's not the case is infrastructure. So startups like Ehrnan are enabling people to get access to money that they've already earned in a much more frequent manner. So that was super helpful for understanding the nature of the

problem. Tell me a little bit more about why the Fed is even involved with checks in the first place, because every time we talk about the Federal Reserve and checks, I'm so confused at why this cannot just be handled at whoever holds the money is where the money comes. Why is there even this player involved. I don't know how a check is cashed. So the Fed is involved in regulating most aspects of payments. Let's say I write you a check and I have zero dollars in my bank account. If your bank gave you that money, then they would then pull it back from you and the whole system would just be a mess. And so someone needs to make sure, it's called good funds, are actually available on both sides. And so it is for the protection of both consumers across the side. The problem is that this system was

invented literally back in the days when people wrote checks and you would have to mail them to like a previous instance to the institution where they were coming from to make sure that you could actually check that the funds existed to then send it back. And so just the infrastructure has not progressed to where it should today. The technology is today. Like the big innovation on checks is, you know, that bar at the bottom where now they can be electronically led and you can send it back and forth at least the checks electronically. But we've got a long, like we can progress a long way from there. Okay. So that's great. Angela, super helpful context. So bottom line it for me. How should we think about this recent news announcement about

Fed now, or as you said, Fed five years from now? How should we think about it? I think we should be excited and push towards our industry making a much faster move towards real-time payments. And I think if the broader population really understood who this was affecting most, which is the more than half the population that live paycheck to paycheck, there would be more pressure on either banks to join the existing network and the existing network to behave well and treat everybody fairly and for the Fed, if they decide to go their direction, to move as quickly as possible, while also maybe regulating faster participation in the existing network such that we can, to be honest, catch up with the rest of the world who's been here for over a decade.

Thank you, Angela, for joining this segment. Thank you for having me. Okay. Our next segment on 16 Minutes on the News is about the death of retail given the news that iconic retailer Barney's filed for Chapter 11 bankruptcy this past week. So just to give the specifics and quickly summarize what the news is, Barney's plans to close 15 of its 22 locations, which means it then only has seven remaining stores, including its flagship on Madison Avenue. Barneys, and this is what makes it even sadder, is that it's been around since the Great Depression. And they were pioneers

for trends such as relaxed suits and menswear, so by bringing Armani to the U.S., putting perfumes in the back of the store instead of in the front of the store. And most iconic of all, building windows instead of covering walls with extra racks. So these are some of the things that Barneys has done. And Barneys has actually filed for Chapter 11 bankruptcy before in 1996 when they fell out with some of their investors. But this year's filing is due to higher rent, obviously, more online retail shopping and direct-to-consumer marketing, all of which are connected to tech. So now let me introduce our A6 and Z expert, Jeff Jordan, general partner, managing partner, and a deep expert on all of this. Welcome, Jeff. Thanks, Arnold. Great to be here. So you're the person I want to tell

me how to think about this news. Like, is this more of the same? Is it something new? I mean, I should point out that Barney is also a dinosaur. And unfortunately, the offline retails, a lot of them are dinosaurs. I mean, actually, I first started blogging about this. And I went back and looked today, 2012 about e-commerce, taking chair and being advantaged over offline commerce. And so there's just been a steady drumbeat of bankruptcies, restructuring, closings. And unfortunately, I don't think it's going to stop. Really? Yeah.

I think it's long. I thought Barney's had a chance because in this world of e-commerce, a lot of these physical stores would have a really special role to play, especially in showrooming and being able to really have a customer experience. And the trend is more now towards experiences. So why Barney? What retail chains, physical retail chains, are really highly leveraged. They take enormous amounts of capital.

And they have enormous, basically fixed costs, rents of fixed cost. Inventory is a quasi-fix cost. And if sales start declining, they can go from profitable to unprofitable extraordinarily quickly. And I actually watched this happen at the Disney stores. When I was there, Disney stores were minting money. And then they did a different strategy. the top line went down 5, 10%, and they started hemorrhaging money.

But it wasn't because of online or it was just a different strategy. That was a different strategy. That, for me, was self-inflicted. New management came in and tried a different strategy that didn't really work. Just the 5, 10% change in the top line made the chain go from profitable and unprofitable. So as e-commerce nibbles away at the share, all the stores in aggregate lose a little bit of sales. and at some point they just become unviable. The flexibility and opportunity that software-based companies have

is that they don't have the legacy of fixed costs, which is the dinosaur around the neck, the albatross around the neck. Yeah, I mean, now, e-commerce has other problems, which is largely showrooming also happens off online. If you want to price shop, you can price shop, and that then caps competition for the same consumer and that window shopping caps the opportunity for online players

to charge a lot. So one of the most baffling things is that there are only a few true winners in e-commerce in the United States, but no one's making money. They're just all competing for the same consumer with essentially the same product. So nothing works. Like, is there any place where it does work? So grocery is the largest single category of U.S. retail, more than apparel, more than personal care or things like that. And it had historically been completely immune to digitization. So, you know, Webvan was the iconic failure of trying to do groceries electronically. The big difference in groceries is the inventory is better served being close to the consumer. And so what grocery chains are essentially are distributed warehouses.

Physical grocery is a way to combine kind of a hybrid both offline and online, helping, you know, the grocery chains around the world deliver to people in their area. Fred Smith famously said when the Internet came, He didn't think groceries could be delivered through the internet because, you know, you put your eggs in a truck and it bounces around all day and it comes, you know, 10 hours later or whatever. That doesn't work. It does work if it's the grocery down the street. Okay. So bottom line it for me.

How should we be thinking about all of this news that they're retail? People have been talking about it for years. On one hand, I see lots of, lots of cars in the parking lot and all the malls. On the other hand, I see news of bankruptcy and I also see a lot of internet shopping going on. What you're seeing is the best malls and the best stores continue to thrive. Now, all the marginal change and the marginal malls are closing. I did a blog post years ago about the demalling of America. Because if all the stores dies, the malls end up dying.

And my favorite quote was a REIT owner who said, we're not. A real estate investment trust. Yeah, real estate investment trust. He goes, we're not overbuilt in malls. We're just under demolished. Malls are being repurposed. They're being torn down or they're being repurposed into town centers. But, you know, that's changed.

In our previous episode, we talked about how e-sports are now taking over certain malls. So who knows what the future here is? That could be. Yeah, that's Stanford E-Sports Center. Thank you for joining, Jeff. It's a pleasure. Thank you.